Tuesday, August 9, 2016

For Ting, Operating Costs are Key to Business Model

Low overhead, and low operating costs--rather than any special capital investment advantages-- appear to be a key element of the business plan for Tucows mobile and Internet access businesses.

But picking the right market might be even more important. A delay in Google Fiber construction plans in Portland, Ore. might provide an example. Where Google Fiber might once have hoped to be the only provider of gigabit Internet access in Portland, both major suppliers Comcast and CenturyLink already are moving to do so.

No matter how attractive an offer Google Fiber might supply, it could be only the latest of three major ISPs to offer gigabit services in that market.

And that likely will be the case for any successful new facilities-based independent Internet service providers, as well. That has been the case for cable TV operators, who now are the market leaders for high speed Internet access in the U.S. market, and likely is true for Google Fiber.

New gigabit Internet access operations, built using fiber to home network platforms, probably cannot significantly outperform tier-one providers on network build costs. So to make the business case work, assuming use of price discounts as a key marketing tool, other costs must be sharply lower.

In its mobile business, Ting seems able to acquire new customers for less than a $100, far lower than one sees at larger service providers, where costs can range from $300 and up.

For Tucows, that is key, as it does not seem able to build fiber to home networks cheaper than might be expected for a tier-one service provider.

Though it estimates an average cost of $2,500 per customer to build FTTH plant, Ting Internet is spending closer to $3,000 per customer for its Holly Springs, N.C. network.

At an assumed 20 percent take rate in the first year and 50 percent in five years, that implies a per-passing cost of about $600. That is within the range of current FTTH network build costs, though arguably not including activation costs.

And, so far, Tucows seems to generating gross margin for network access of 48 percent. And, in large part, that seems to be the result of lower operating costs. Some telcos have operating costs in the 60-percent range.

As a percentage of revenue, total operating expenses were down about 0.5 percentage point to 20.4 percent,  compared to a year ago, Tucows says.

At the same time, the major carrier price reductions for mobile data have narrowed Ting’s competitive positioning. “Over the past couple of years as the carriers have reduced data prices, we have clearly lost some of our competitive positioning,” said Elliot Noss, Tucows CEO.

That further emphasizes the key role played by operating costs in the business model. Ting operates with lower retail prices and typical capital investment. Only in the marketing and other operating parts of its business can Ting gain advantages.

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